Market Share: With Companies Looking to Cut Costs, Office Shares Are All the Rage
Jane K. Callahan March 25, 2015, 12:55 p.m.
The powers that be in New York City have done a great job of attracting startups—keeping them, however, is another issue.
But an up-close view of the Empire State Building is increasingly becoming a viable option for young businesses. Why? Co-working companies—which offer cut-rate office space so long as tenants are willing to share—are rushing into the Midtown South market, and beyond.
There are almost too many shared workspace landlords to count, so in an attempt to scramble for their own piece of the pie, they’re all marketing themselves differently.
For example, In Good Company offers shared workspaces exclusively to women, while the Writers Room leases shared workspace only to writers. Edison Offices exclusively leases executive suites and private offices, and Makeshift Society leases spots in a common space that’s geared toward freelancers.
Even New York City’s largest office landlord, SL Green Realty Corp., jumped into the shared workspace fray with its wholly owned subsidiary, Emerge212, which offers fully furnished, boutique shared office spaces in Midtown. Currently Emerge212 rents out three locations, all of which are SL Green-owned properties, to shared-space tenants.
SL Green sensed the appetite for this early; they started Emerge212 in 1999.
“SL Green got into this market because of the dot-com boom,” said James J. Kleeman, the director of Emerge212. “A lot of companies were starting up in New York, and all these dot-coms were moving at a fast pace, and needed a place where they didn’t have to worry about all that comes with [getting and maintaining] an office space long term, or expanding an infrastructure.
“Even when the bubble burst, there was still a demand for other industries that needed space [in that same way],” Mr. Kleeman said. “During the recession in 2008, when everyone was suffocated, our industry was sustained. Companies that had to downsize and wanted to get rid of the risk and liabilities [of a traditional office rental] ended up being our clients. Now more than ever, people are preferring to have that type of nimble model.”
This is all well and good for “soloprenuers” who are tired of working in coffee shops, and certainly gives companies on a shoestring budget a fighting chance. But PivotDesk has found a pocket in the market that makes co-working just as beneficial to landlords, brokers and larger companies as it does to startups.
Unlike most of the co-working landlords in the market, PivotDesk, which operates across 45 states, doesn’t sign monster leases or buy properties, but instead helps companies that have more space than they need to sublease empty square footage.
PivotDesk has clients in several Midtown locations: Fresh Planet, located at 19 West 34th Street, currently has four spaces open at $390 per month; Gleem & Co., located at 27 West 20th Street, has six spaces open at $500 per month; and SGP International, at 16 East 40th Street, has four spaces open at $500 per month.
“The overall concept is similar to Airbnb in that we arrange relationships”—but ones that last six to 12 months, said David Mandell, the co-founder and chief executive officer of PivotDesk, who claimed PivotDesk’s approach tends to last longer than other co-working solutions.
According to PivotDesk, New York City-based businesses that rent office space see an average annual cost of $60 per square foot. PivotDesk brings that overhead down to a monthly cost per person of around $550, which equates to about $3.66 per square foot, or roughly $550 per month, per person.
With this model, “Your business can grow like it’s supposed to, instead of leases dictating what you can do,” Mr. Mandell said.
Mr. Mandell, a serial entrepreneur, got the idea for PivotDesk when he was consulting for a company in Boulder, Colo. that had 10,000 square feet of unused office space. He sat across from the chief financial officer, who often expressed his concerns about what to do with the fallow space since “no broker likes to do a sublease because it’s not where they make their money,” Mr. Mandell said.
At the time Mr. Mandell was mentoring several startups in the area that were trying to figure out how to secure affordable office space under a flexible lease, something that Mr. Mandell relayed to the CFO. But the CFO didn’t want the responsibilities of a landlord, like awkwardly shaking down tenants for past-due rent or dealing with an employee who left food in the fridge on Fridays.
Mr. Mandell knew that when a company signs a five- or 10-year lease, it will take more space than it needs because of anticipated growth, and so there were plenty of companies in this same situation. That’s where Mr. Mandell saw a demand he could meet.
“I realized … that if I could make it easy for them to monetize that extra space, then I could help these other companies that had no idea what to do,” he said. “I spoke to a lot of real estate people, including attorneys, and they all looked at me and said, ‘You can’t do that.’ So, being the entrepreneur I am, I did.”
In 2012, PivotDesk was born. While demand from the tech industry helped his business take off, Mr. Mandell now helps prospective tenants in every industry.
PivotDesk is almost set up like a dating site for workers: to make the most of their empty space, “host companies” create a profile on PivotDesk, complete with photos and prices, as well as a rundown of the office environment. (Is it noisy? Do people wear headphones? What industry is it?) Both sides meet to see if they’re a good match, and if they are, PivotDesk helps close the deal. The host doesn’t have to worry about chasing checks or credit risk, and can always get their space back when they want it, since arrangements are based on a per person, 30-day license.
PivotDesk doesn’t tell host companies what to charge for space, but does make its money by taking a 10 percent license fee every month.
“Companies have saved thousands of dollars per year on their bottom line, enabling them to use those funds instead to hire employees or invest in actually growing their business,” said a spokeswoman for PivotDesk.
Mr. Mandell said now that the shared office space market adds value, PivotDesk finds itself working increasingly with brokers. Last July the company launched Cultivate, a commercial referral platform for brokers who work with prospective tenants that are nervous about signing a long-term lease.
For brokers, that means that instead of turning away clients and losing potentially lucrative relationships, Cultivate helps them place young companies in a good space until they are ready for a real lease.
“We help them maintain that relationship as the customer grows. It’s all about relationships in the brokers’ world,” said Mr. Mandell. After all, you never know if you’re helping out the next Google.
New York City is PivotDesk’s biggest market, ahead of both San Francisco and Boston, accounting for approximately 60 percent of the company’s national revenue.
Mr. Mandell said the PivotDesk model is working best in markets like New York City and San Francisco because “real estate is a scary experience right now. In a lot of cases, you can’t even find it.” He said that office space is in such demand that large companies are snatching up property even if they don’t need it.
“In places like Flatiron and Soho, it’s hard to find something that isn’t tied to a 10-year lease,” he said.
For emerging businesses, things don’t always go as planned, and “sometimes you go from five people to 30 back to 20 up to 100 in the course of three years,” Mr. Mandell said. “That’s the nature of how we do business now. Real estate is a static structure, so unless you want to move offices every year, you have to have that space.”
Mr. Kleeman said that New York City firms need something less traditional, and this has triggered the emergence of several variations of co-working arrangements in the leasing business.
“We are hearing from a lot of people that when they are looking to raise funds, it’s much better look to an interested investor when the company doesn’t have a 10-year lease obligation, which is a liability,” Mr. Kleeman said.
One of PivotDesk’s New York City “host” clients, gaming company FreshPlanet, currently subleases to 25 people from about eight companies.
“Initially, we thought about doing this ourselves, but went with PivotDesk because we did not want to spend too much time looking for new companies, signing contracts, collecting the money,” said Mathieu Nouzareth, the CEO of FreshPlanet. “We also were interested by the fact that this is month-to-month, so it’s flexible for everyone.”
Mr. Nouzareth said the goal was to lower the cost of their 12,000-square-foot office space, not to make a profit.
While PivotDesk may have carved out a relatively untouched niche in the co-working market, several massive companies are also vying to win business with a big emphasis on perks and culture.
WeWork, which started with nine locations a year ago and expects to reach 60 internationally by the end of this year, is the fastest growing co-working office space provider. The company has been on a tear both in and outside of New York City; last month it signed a lease for 240,000 square feet at 85 Broad Street (eight of its 15 New York City offices are in Midtown or Midtown South), and a few weeks later secured 65,000 square feet at its fifth Bay Area location in San Francisco. The company has been valued at $5 billion by investors, according to The Wall Street Journal, which predicted that the company will go public within the next two to three years.
Forbes described WeWork’s business model succinctly: “[They take] out a cut-rate lease on a floor or two of an office building, [chop] it up into smaller parcels and then [charge] monthly memberships to startups and small companies that want to work cheek-by-jowl with each other.” Rates vary by location, but memberships start at $425 a month for a hot desk (meaning you get whatever desk is free at the time) to $750 per month for a private office.
WeWork’s signature office designs are a replication of Silicon Valley chic; most listings boast free beer, micro-roasted coffee and modern, punchy decor. One has a bocce ball court. Some locations, like the one at Bryant Park, offer hot desks, while others primarily offer private offices and dedicated desks.
AlleyNYC is another giant in the field, branding itself on its website as a “New York-based office space for entrepreneurs who hustle.” The company has two locations: a 16,000-square-foot co-working space located at 500 Seventh Avenue between West 37th and West 38th Streets that houses 91 companies, and a recently secured two full floors at its third space with a 10-year lease: 36,000 square feet at 119-125 West 24th Street between Avenue of the Americas and Seventh Avenue. AlleyNYC’s rates start at $25 a day for a hot desk and run as high as $2,200 a month for personal office space.
AlleyNYC’s newest lease made it the first tenant of Kaufman’s Madison Square portfolio.
“They chose the location because they felt they were able to obtain a demand, it has a lot of transportation, and it’s a 24/7 neighborhood,” said Grant Greenspan, a principal and senior vice president of Kaufman Management, which handled the deal.
Mr. Greenspan said that over the last five years, Midtown South has seen an influx of social media and Internet-related businesses, as well high-frequency traders and hedge funds that are populating the small side streets of Flatiron and NoMad.
“Right now it’s a neighborhood that has little to no space,” Mr. Greenspan said.
As a tenant, AlleyNYC has several appealing factors.
“I had many different co-working tenants approach me for [that building], but what attracted me to AlleyNYC was they are very well financed,” Mr. Greenspan said. “Most of the other co-working tenants were either self-funded or thinly financed. Staying power was important.” He added that the other potential co-working companies wanted the entire 150,000 square foot building, whereas AlleyNYC was willing to settle for just 36,000 square feet.
“They have an edge in the market in terms of dealing with a certain category of creative tenants, putting together events, they have a following already,” said Mr. Greenspan. “But are they much different at the end of the day? No. But all those things attracted me, and they are mitigating my risk.”
AlleyNYC stresses the collaborative benefits of co-working; according to the company’s site, the space is ideal for “early stage businesses, startups and entrepreneurs of all types.” In a video posted to the site, members described it as an “incubator.” (There’s a subtle but important distinction between incubator and other kinds of shared space; an incubator involves an established company providing space for a more junior one that hasn’t gotten its sea legs yet.)
“This model works for everyone,” said Mr. Kleeman. “And I only see it working more as time goes on. He added that he has worked tenants in with every industry, from law firms to personal grooming companies.
It isn’t just small companies and individuals that have come knocking on Emerge212’s door; tech giant Google called looking to rent space for temporary training events.
The big question is how landlords will react.
Cynthia Foster, the president of National Office Services at Colliers International, says that traditional office landlords are not pushing back against this shift—they’re embracing it; Colliers, too, has helped place tenants in co-working spaces.
“Traditional landlords are certainly looking at ways they can do it themselves,” Ms. Foster said.
Ms. Foster said she is seeing a lot of movement toward making the most of an office’s square footage, and that this is a complicated process on the developer side, because they need to think about what’s in demand, and make sure that demand is still there when a project is finished. “Certain floor plates are better suited for shared workspace tenants than others,” she said.
For example, a space with columns is a lot easier to divvy up than one without.
“You’re betting on how many small companies will want that space, and where the demand will come from in a particular building,” she added.
The only drawback to shared workspaces that she could think of is a tendency toward clique formation. “When you have multiple eating and coffee areas, it becomes less collaborative,” she said.
Ms. Foster also said that shared workspace is just not doable for companies where privacy is key, like certain sectors of private wealth and equity.
Mr. Greenspan said there are several concerns about leasing to co-working companies form the landlord’s perspective.
“The market is reaching a saturation point; certainly in Midtown South, the barriers to entry are relatively inexpensive other than the ability to satisfy a landlord’s financial requirements,” Mr. Greenspan said. “The issue is that these companies reach a certain critical mass, and the question is: ‘How much longer are they going to stay in this space?’”
Mr. Greenspan said that as startups become more successful, they graduate into a traditional office rental, and over five years co-working companies will see attrition.
“The other issue that concerns us is the usability of these co-working spaces. We have to consider [what we will do] if they did not last through the 10-year lease commitment,” Mr. Kaufman said. “Some of the layouts have a significant amount of compartmentalized offices. When you have a honeycomb of rooms, that doesn’t work for a typical office tenant. We had to spend significant dollars to reuse that space for the next tenant.”